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I agree with Texas Proud that home prices have been artificially inflated because of subprime loans. This will eventually correct itself. Home prices tend to go down slowly, but this correction will take place slightly faster this time because of the huge number of foreclosures. When an appraiser goes out obtain comparables for a house that has sold, there is a good chance that he may have to use one of the foreclosures in the neighborhood to base his appraisal on. This will have a serious impact on prices, especially areas where there are a high percentage of subprime loans.
The problem though is this: Too many people went out and refinanced their homes with the inflated prices and cashed out. Many others obtained seconds on their home. Basically, homes were used as an ATM machine.
Many banks are reporting that people are now maxing out their credit cards, as they've used up all of the equity in their homes and have no where else to go for money.
IMHO, the problem with the artificially inflated home prices, is that Americans have borrowed more money than if the subprime money had never become available. I'm not referring to just the homes that were purchased with subprime money, but the resulting 1st and 2nd mortgages that people took out because of the "wealth effect."
Two-thirds of GDP is consumer spending. With so many having already taken all of the equity out of their homes and maxed our their credit cards, what will drive the economy? It was the housing market that helped prop of the economy after the dot-com bubble burst. What will serve to prop up the economy this time?
It's my belief that we are in for one of the worst recessions in U.S. history. In fact, it's probably already begun.
Another thing to take into consideration is to what extent this bailout and subsequent freeze on interest rates will help. The whole notion of a bailout is based upon the premise that people want to stay in their homes. When home prices drop 20% in some areas and people are upside down on their mortgage anyway, with huge payments and rental prices going down, many will elect to walk away from their mortgage responsibility. What will they have to lose, but bad credit for 7 years?
Let's face it, right now the U.S. Treasury, banks, securitization trusts, and federal and state governments are running scared and have a very good reason to be. Many of these subprime borrowers have bad credit and are not the most responsible people in the world. What makes anyone think they will sacrifice to stay in homes with increasing negative equity?
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